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Interest rate commentary for 17 Oct – 21 Oct 2016

This week showed it is far too early to say “the end is nigh” for bond holders, although the spike in bond yields which bond markets had experienced in recent weeks may have suggested otherwise. For now, however, yields have stabilised as central bank officials such as Janet Yellen and Mario Draghi do their best to manage expectations.

However, the chiefs of arguably the world’s two largest and most powerful central banks seem to be working at odds with each other. Janet Yellen has effectively stated she would be happy to “let the economy run hot” which raised the spectre of future inflation running out of control leading to a rise in bond yields.  Mario Draghi left open the door for the ECB’s bond purchase programme to run past its March 2017 end date, which had the opposite effect on yields.

Close Week
Cash Rate%   1.50
90day Bank Bill%   1.74  -0.01    1.75      1.74
Aust 3y Bond%*   1.69  -0.01    1.76     1.65
Aust 10y Bond%*   2.27   0.03    2.35     2.23
Aust 20y Bond%*   2.83   0.05    2.91     2.82
US 2y Bond%   0.82  -0.02   0.83     0.79
US 10y Bond%   1.74  -0.06    1.77     1.74
US 30y Bond%   2.49  -0.07   2.52     2.49
iTraxx 103.8  -0.75  105.0   103.0
$1AUD/US¢ 76.05  -0.11  77.35   75.81
* Implied yields from Dec 2016 futures

September CPI figures were released by several advanced economies showing mixed levels of success in awakening the inflation dragon. In the US, headline CPI figures were disappointingly low while core CPI ticked up. In the UK inflation seems to be trending up but it is far too early to call. In the eurozone, year-on-year inflation is still at anaemic levels, although it is in positive territory.

All of which makes the RBA’s job complicated. Higher central bank rates offshore provide an incentive for the RBA to keep the official cash rate steady in the absence of some truly-low inflation figures or poor unemployment data. In cash markets the probability of a rate cut was higher but some would describe the rise as being technical while changes in the market for term deposits were few and far between but the ones made were very much on the large side.

Corporate bond activity slowed down but it was still robust with some large deals put together by local and foreign banks as well as a couple of well-known aviation companies.

ASX-listed hybrids and ASX-listed notes had an interesting week with the flagging of a new AT1 hybrid as well as some not-so-welcome movements for notes issued by one of Australia better-known entertainment companies.

We hope you enjoy reading this week’s YieldReport.

September 2016 monthly interest rate commentary

Australian Government bond yields started the month close to all-time lows and looked as if they would stay there, or go lower, despite above-trend GDP growth. That was until the European Central Bank September meeting put the cat among the pigeons.As ANZ put it, the ECB’s “comments were less dovish than the market expected” and higher yields in Europe flowed through to the US and then to Australia. When the US Fed’s FOMC voting member Rosengren made some fairly hawkish comments it was as if he added to proverbial straw to the camel’s back.

Even though Australian bond yields are still attractive relative to European and US yields, investors were viewing them in the context of looming higher yields in the US and Europe. There is also a supply issue, as CBA pointed out “…ACGBs have weakened to both Swap and to OIS. All of these combined suggest there is an oversupply of bonds in the market…”Click here to read more

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